Revenue receipts are money received by a business as a result of its normal business operations. In this way, revenue receipts affect the profit or loss of a business. Capital receipts are non-recurring receipts that either increase a liability or decrease an asset. A capital receipt generally results from financing activities rather than operational activities, but there are many other differences. A receipt journal entry for revenue affects cash or accounts receivable and revenue. A receipt journal entry for capital will affect cash and an asset or liability account. Revenue and capital expenditures are classified similarly.
Revenue receipts are the rights of a business to compensation resulting from normal business operations, and are recorded when the business has earned the right to receive them. Generally, this means that once goods are delivered into the hands of the customer or services have been substantially provided; the business has earned the revenue.
What Are Revenue Receipts?
Revenue receipts are the rights of a business to compensation resulting from normal business operations and are recorded when the business has earned the right to receive them . These receipts are recurring and will affect the business's profit or loss on the income statement. Generally, this means that once goods are delivered into the hands of the customer or services have been substantially provided, the business has earned the revenue. However, rents and interest payments received are also considered revenue receipts. Regardless of whether cash is received or an accounts receivable balance is increased, these are still called revenue receipts.
What Are Capital Receipts?
Capital receipts are funds received from increasing a liability or decreasing an asset. In simpler terms, capital receipts are typically the result of the business taking out a loan or selling unneeded equipment. Capital receipts are not expected to be recurring. They affect the balance sheet because they must affect asset or liability accounts.
What Is the Difference Between Revenue and Capital?
There are many factors which differentiate revenue receipts from capital receipts. Revenue is recurring out of necessity. If revenue stops coming into a business, it is not likely to survive. Revenue results from business operations. Capital receipts, however, are not recurring. They result from specific situations. For example, a piece of equipment could wear out or just no longer be useful to the business. Capital receipts, then, are not operational. Revenue receipts affect the income statement and can be saved to create cash reserves for future endeavors or paid out as dividends. Capital receipts affect the balance sheet and cannot be used for reserves or dividend payments.
What Does a Receipt Journal Entry Look Like?
If any confusion remains about whether or not a transaction is for a revenue receipt or a capital receipt, you might review the accounts that are affected when you prepare the journal entry. Revenue receipts affect revenue and either cash or accounts receivable. Capital receipts will usually affect cash and either a liability or a fixed asset.
First, review some examples of revenue receipts. A cash payment received for services rendered would debit the cash account and credit revenue. A company's order of parts and accessories from your business would, upon completion, cause a debit to accounts receivable and a credit to revenue. In either case, revenue is increased by being credited and either the cash asset or the accounts receivable asset is increased by being debited.
Recall that capital receipts will decrease an asset or increase a liability. A journal entry to sell surplus equipment, for example, would debit/increase cash and credit/decrease the Property, Plant and Equipment fixed asset. If the business takes out a loan, it will debit/increase cash and credit/increase a long-term liability account.
What Are Capital and Revenue Expenditures?
Similar to receipts, expenditures can be classified as either capital expenditures or revenue expenditures. Capital expenditures would involve outlays of cash to acquire assets like buildings or equipment. These expenditures would be for assets intended to last for longer than one year. Revenue expenditures are those that are necessary for normal business operations and are tied to earning the revenue receipts of the same accounting period. For example, a retail store might rent the building it occupies. It pays this rent on a monthly basis, and the building is necessary to the operation of the business. Revenue receipts cannot be generated unless the store is open. Therefore, the rent is an operating expense tied to revenue, otherwise called a revenue expenditure.